On September 24, 2019, the Department of Labor (DOL) announced its final rule to change the Fair Labor Standards Act’s (FLSA) salary basis test. The salary basis test is integral to classifying an employee as exempt from overtime payments. In order to classify an employee as FLSA overtime exempt, an employer must be sure that the employee meets a salary basis test, which establishes a salary threshold, as well as a duties test, which establishes the types of responsibilities and knowledge required to be eligible for an exemption. The salary basis requirement is currently $455 per week, or $23,660 per year, however, effective January 1, 2020, the final rule will increase the threshold amount to $684 per week or $35,568 per year, a slight increase from the originally proposed amount. 

The final rule further allows employers to include up to 10% of the salary in bonuses and incentive pay. The rule raises the compensation requirement for highly compensated employees—who are subject to minimal duties test requirements— from $100,000 to $107,432, which is significantly lower than what was initially proposed.

The DOL is estimating that 1.2 million additional workers will be entitled to minimum wage and overtime pay as a result of the increase to the standard salary level. DOL also believes that over 100,000 workers will be entitled to overtime pay as a result of the increase to the Highly Compensated Employees compensation level.

Government contractors will face the prospect that some employees would be newly eligible for overtime under the new rule. In this case, the contractor may choose to either convert them to hourly, non-exempt workers or raise their salaries as an alternative to paying overtime. This should be carefully calculated in order to avoid penalties.

If a contractor chooses to convert employees to non-exempt and to pay an hourly rate, there could be a significant price impact on contracts bid before this rule is effective. This could significantly impact cost of performance because those employees may have to work overtime.

Employers with salaried employees under $35,568 annually also need to calculate whether they should convert employees to non-exempt or raise their salary. Now is a great time to revisit whether these positions still meet the requirement of the duties test, the second component of exemption testing. Even though the test has not changed, many violations can result from misunderstanding this requirement.

Should you have any questions or concerns, please feel free to contact our office.